Difficult macroeconomic conditions for the insurance industry mean it's time to revamp the asset side of the business. BCG's Philippe Morel explains how changing the approach to asset liability management from a bottom-up to a top-down approach will help to deliver returns.

Insurance companies are the world’s second-largest money managers. However, a perfect storm of disruption—which includes the ongoing low interest rate environment, more stringent regulatory and compliance management requirements, changes in consumer and market demands, and increased volatility across all major asset classes—is forcing insurers to look for additional growth levers. To find them, insurers must continue to evolve their traditional investment and asset management practices, and adopt new strategies that can transform cost centers into new sources of profit.

BCG has observed that asset management captive players that grow and capture external flows will typically experience not just a higher cost base but also a higher revenue base and overall positive returns compared to their captive equivalents.

BCG can help insurers preserve what works within their existing business models while helping them transform for growth via one or more new strategic solutions. Our solutions take a strategic approach to operational management, business model and product innovation, and are designed to provide insurers with the ability to maintain market share while boosting their competitive edge.

Product-Oriented Solutions

By offering asset management capabilities to third parties, insurers can leverage their existing capabilities and resources to generate fees-based income. Having a larger asset base reduces the unit costs associated with producing or sourcing asset management services. When coupled with new revenues from third-party customers, it can help generate significant and less volatile profit, while generating free cash flow, low capital absorption, and potentially a boost in market valuation.

BCG has helped insurers go through this journey. The typical steps include:

Identify the ambition. As an example, how much should the third-party business contribute to profits in the future?

Identify potential plays, such as high-potential asset classes that are prioritized based on their attractiveness and ease of participation.

Target customer segments, countries, and regions in scope.

Define the market entry strategy, which is usually a mix of organic growth, partnerships, joint ventures, and/or acquisitions.

Define the target operating model, such as where to extract synergies.

Unit-linked (UL) platforms and capabilities bring insurance and investment products into a single integrated plan for investors. UL businesses are extremely attractive to insurers because they involve lower capital expenditures and deliver consistently higher profitability than traditional products. At the same time, new regulations on payment, disclosure, and transparency offset competitive hurdles and accelerate the creation of UL platforms.

Still, there are challenges. UL products require strong innovation in product design, distribution, and customer service in order to meet customer preferences and to effectively compete against alternative providers. In addition, insurers must consider creating a central platform to achieve the right level of scale to effectively manage and reduce complexity and overall costs.

Investment-Strategy-Oriented Solutions

As traditional approaches to asset management are increasingly challenged by declining returns on investments, inefficiencies in asset allocation, and unmatchable liabilities, a new approach to asset liability management (ALM) is needed to preserve sustainability of the business model and gain a competitive advantage.

To do this, companies must act on these three primary levers:

Internal governance and processes that are tighter and more strategic

A deep and critical assessment of current and traditional investments, which can enable bolder and more innovative investment decisions

In our experience, ALM decisions can enable insurers to address between 80% and 90% of their overall investment return and asset capability requirements. However, by pulling these three levers, insurers can achieve significant returns, including 10 to 15 basis points of additional returns on assets.

BCG provides a range of services to help insurers develop a new, sustainable approach to ALM. As an example, a European insurer whose traditional business had been significantly impacted by low interest rates, increased volatility, and capital charges turned to BCG for a comprehensive review of its entire ALM process. The firm wanted to make sure it could fulfill liabilities on its own, keep its risk profile in line with internal risk appetite, and still contribute to overall income. After spending time evaluating the organization and relevant systems and activities, our experts designed and operationalized new end-to-end ALM and capital management processes and models; approved and initiated monitoring of a new risked-based Strategic Asset Allocation process; and defined, approved, and initiated monitoring of the new group capital plan.

The disruptions in the insurance business are leading insurers to shift their investment mixes toward alternative asset classes, such as commercial real estate, infrastructure equity, corporate debt, and private equity. (These are expected to grow more in size and yield than other asset classes.) Moving to this strategy requires insurers to evolve their risk appetite, make more strategic choices, and transform their investment office.

Insurers can enter alternative investment markets by deploying various setups based on strategic goals, maturity, and required time to market, but the transformation journey of the business itself will be long and profound. BCG helps insurers work through this transformation with a proven framework:

Fund the journey. This component starts with a market assessment that explores feasible short- and long-term solutions and develops an early profit solution. We then drive early wins by selecting partners and defining a short- and long-term setup. Finally, we prepare a foundation by gauging client capabilities to free up the funding needed for future investment.

Win in the medium term. In this step, we prioritize opportunities and asset classes, and define high-potential solutions. We build for the long-term by leveraging recent capabilities and defining next investment and solutions. Finally, we structure the strategy process by developing execution options and exploring the next wave of solutions.

Choose and enable the right structure, team, and culture. Here, we design a roadmap that defines the key steps needed to acquire needed competencies and build the right team to sustain success. We create the short- and long-term setup, including a transformation program and project management office to enhance the role of the investment office. Lastly, we provide the organization with the leadership development and training to drive execution and engage for results.

We relied on tenets of this framework in our recent work for an Italian life insurance leader.

Recognizing the need for diversification in a low-yield environment, the firm decided it needed to increase its allocation to private assets, develop a make-buy strategy for each private asset class, and define a transformation plan for its investment office. BCG worked closely with the company to deliver a blueprint for short- and long-term alternatives, a formal RFP process, and a make-buy strategy for each asset class. After an initial analysis of the insurer’s strengths and weaknesses, we also created a shortlist of relevant advisors, and then helped the firm choose the most suitable advisors according to specific criteria.

As a result of this work, the insurer realized the following improvements:

A nearly tenfold increase in alternative investments, which has grown from 1% to 12% of the firm’s overall portfolio.

A benefit of one to two percentage points on general account-expected yield, with a limited increase to the solvency capital requirement.

Why BCG?

Identifying and transitioning to new business models that take advantage of existing capabilities and transform operational businesses into strategic revenue producers is not an easy task. BCG is uniquely positioned to help insurers transform their investment and asset management operations to effectively compete and grow in a new market environment. BCG stands apart because of our:

Collaborative and customized engagement model, which provides our clients with clear understanding and ongoing ownership, as well as fact-based, insight-driven, tailor-made solutions to complex and emotional questions

Many best-in-class companies have already seized opportunities and implemented new investment mixes that are heavy on alternative investments, such as real estate, private equity, and corporate debt.

The Boston Consulting Group is an Equal Opportunity Employer. All qualified applicants will receive consideration for employment without regard to race, color, age,religion, sex, sexual orientation, gender identity / expression,national origin, protected veteran status, or any other characteristic protected under federal, state or local law,where applicable.

This website uses cookies to improve functionality and performance. If you continue browsing the site, you are giving implied consent to the use of cookies on this website. See our Cookie Policy for details.